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Electric Reform in Great Britain: An imperfect Model.

Fortnightly Magazine - June 15 1996

took over an English REC. The Government allowed the takeover to proceed because it was not viewed as a major encroachment. (The Scottish system is run largely separately from the England and Wales system (em along fully vertically integrated lines (em with trading between the systems only at the margin.)

The next step toward vertical integration occurred in Autumn 1995, when Eastern Electricity (an English REC) agreed to buy 2,000 Mw of coal-fired plant from PowerGen (the Regulator had forced PowerGen to sell the capacity). In fact, Eastern had already made a major commitment to generation and had recently been taken over by Hanson, a diversified, multinational company. In April 1996, National Power agreed to sell Hanson the 4,000 Mw of coal capacity that it had been forced to sell. If these sales are finalized, Hanson will own an integrated generation and supply company that would control about 14 percent of the generation market.

The deintegrated structure faced its greatest challenge with PowerGen's bid for Midlands Electricity, followed swiftly by National Power's bid for another REC, Southern Electricity. At this point, the Government felt compelled to act, referring the bids to the Monopolies and Mergers Commission (MMC), a semi-autonomous body that investigates issues of monopoly and merger, reporting to a Government Minister. The Minister is obliged to publish the report and to comment on its findings, although he is not obliged to adopt the MMC's recommendations. The Minister made it clear when he referred these takeovers to the MMC that vertical integration was not at issue, but rather the size and market power of the companies created.

The situation was further complicated by a possible takeover of National Power by a U.S. utility, The Southern Co., which had already taken over an REC, South Western Electricity Board (SWEB). Faced with the possibility that foreign owners would take over the largest generation company, and in so doing become the largest distribution and supply company, the Government chose not to accept the MMC's recommendations and disallowed the takeovers. In fact, the Minister made it clear that the Government's golden share in National Power and PowerGen would be invoked to block the takeover. [Although the REC golden shares had a fixed time span (to March 1995), the generator golden shares are open-ended, until the Government chooses to relinquish them.] However, the Minister reemphasized that the problem was not with vertical integration, but with timing and the size of the companies created. Large integrated companies, the Government claimed, might jeopardize the introduction of competition to the residential market in 1998.

The structure of the electricity supply industry now has become somewhat anomalous. The Eastern Group will boast a generation market share of about 14 percent, compared to PowerGen, whose share will fall to about 15 percent. It now seems possible that, sooner or later, by a process of REC takeovers and mergers and redistribution of generation assets, the industry will become dominated by a handful of vertically integrated generation and supply companies.

Achieving the Vision:

Increasingly Improbable

The Government's vision of competition in generation was that